If you’ve purchased tires recently, you know that prices have skyrocketed compared to the last time you bought them. If you need to buy tires, be prepared to experience sticker shock. Over the last three years tire prices have increased an average of 70%. According to Tire Review, “we are seeing twice-annual tire price increases, and these are ranging from 5% to 12%.” In other words a tire that was $100 at the beginning of 2009 is probably listed around $170 today. From 2005 to today “the same tire costs about 87 percent more.”
So what exactly is happening here? Why have tire prices gotten so out of control in recent years? We feel this topic is important enough for us to shed some light on the tire industry as a whole and help to explain the recent spikes in tire prices.
The primary factors currently influencing tire prices are rubber supply, oil prices, tariffs, emerging markets, supply and demand, and the proliferation of tire sizes. Over the next few weeks, we will examine each of these factors in detail. Our goal is to monitor the situation and keep you properly informed.
Global Rubber Shortage
According to industry analyst Saul Ludwig in the January 2012 issue of Modern Tire Dealer, an industry trade publication “Tire raw material costs increased an average of 26.6% in 2011 compared to 2010. That’s on top of an average 25% increase in 2010 vs. 2009. In particular, butadiene (a chemical used in the production of rubber) and natural rubber pricing skyrocketed.”
The natural rubber used in tires is made from the sap of rubber trees. “Today, the Asia-Pacific region accounts for over 90% of the world’s supply of natural rubber. Thailand and Indonesia alone produce 60% of the world’s supply.” In other words, if something impacts this region, it can dramatically impact the global supply of natural rubber. That’s exactly what happened.
According to a 2010 Bloomberg report “Drought earlier this year (2010) and heavy rains later on hampered tree-tapping across Asian plantations,” said Pongsak Kerdvongbundit, managing director of Phuket, Thailand-based Von Bundit Co., the largest natural-rubber producer and exporter in the world’s biggest supplier. “Global production will lag behind soaring demand for at least another two years.”
Since “rubber constitutes about 42% of raw material costs” in making tires, this shortage is causing an immediate price impact. According to Goldman Sachs estimates, “the world’s stockpiles are a mere 69 days worth of demand – the lowest in more than a decade.” This translates to a natural rubber shortage of about “100,000 tons in 2012”. As manufacturers compete for more natural rubber, they are forced to bid higher prices on a smaller inventory of raw material available.
It’s the basic economic principle of supply and demand. Unfortunately this natural rubber shortage is having a direct impact on all of us in the automotive industry. We will do our best to continually monitor the situation and keep you informed. Please stay tuned for our next segment which will discuss the impact that oil prices are having on tires. As always we welcome your comments and thoughts on this topic.